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dwot (99.56)

Things Are Simply Worse Than the Depression

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July 28, 2008 – Comments (15)

A few times I referred to things that I think gives the economy the potential to be worse than the depression. 

Naked Capitalism has a post today that has a graph of debt.  Relative to the depression the debt load looks to be about 40% more.  Debt is what killed the economy and led to the depression and it is what is killing the economy now.

One of the major things that I have pointed out that was different during the depression is that there weren't the 30 year mortgages.  Going into it mortgages were about half the time and part of what they were able to do to ease the financial strain and burden of the era was go to 30 year mortgages.  In my calculations in a previous post I figured out it could save the average famil 20-25% in their monthly payment.  Well, try going to 40 year mortgages and you only save 6%.  It simply isn't enough to make any material difference.  It is a non-existent tool for this round.

30 year mortgages became a standard thing, but they really are bad thing and should be outlawed except for emergency hardship times.  Mortgages should be 20 years and available for 25 years at a premium insurance rate.

And the mortgages out there right now aren't properly matched to long term money.  That is just a second enormous disaster about the debt.  Short term rates go up and hurting gets really big and constant for the banks. 

The thing in common that all the dire economic outcomes/collapses had in common was unmanageable debt.  I can not look at the graph and come up with a justification as to why things would not be worse than the depression.

15 Comments – Post Your Own

#1) On July 28, 2008 at 2:28 PM, saunafool (98.41) wrote:

So I take it you are pretty bullish...

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#2) On July 28, 2008 at 2:35 PM, lquadland10 (< 20) wrote:

Under oath Ben the Fed said Debt is ok or was it good. 1mill house should go to 40k.Unless the power that be get their way with the amero and the North American Union.

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#3) On July 28, 2008 at 8:52 PM, QualityPicks (39.71) wrote:

30 yr mortgages are fine if you are 30 years old :) But say you are 50 years old, that means you finish paying when you are 80. The only reason to buy vs. rent is to lock your payment (otherwise your landlord keeps raising the rent till you die).

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#4) On July 28, 2008 at 9:48 PM, mgiv (99.61) wrote:

30 year mortgages should be outlawed!.  No way I'm not going to hold down a debt for 30 years.  I'd rather pay a mortgage at 13.5 percent interest for 5 years than 6% @ 30.

Americans are the dumbest investors on the planet.  Not only do they pay a mortgage for 30 years, in the long run they will pay 400% more than the home is worth.

In new york a 500 square foot studio is on the market for 1.8 million dollars.  That's ridiculous and I bet they'll find a buyer.

In Sao Paulo, I can find a place far more beautiful and 4 times larger for 1/10 the price.

And we are so acustom to cheap we dont know what value is.  New house with formica counter top, vinyl floors, cabinets, and siding going for over 350K.  That is retarded.

 

Housing prices will more that half from their current levels.  Thats is the fear.

http://bigpicture.typepad.com/comments/2008/07/house-prices-ne.html

http://bigpicture.typepad.com/comments/2008/07/housing-still-w.html

 

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#5) On July 28, 2008 at 10:39 PM, abitare (99.46) wrote:

dwot,

 Check out this tool.

http://www.spreeder.com/ 

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#6) On July 29, 2008 at 12:22 AM, masterwill (98.72) wrote:

speadreader = efficient use of time

brilliant.

-Thanks

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#7) On July 29, 2008 at 12:58 AM, dwot (99.56) wrote:

Sure Saunafool...

 I have seen that video before lquad.

Qualitypicks, I would disagree that 30 year mortgages are fine at age 30. A 30 year term is simply a loose lending standard and it has the homeowner building practically no equity at beginning, indeed, for the first 15 years...

 mqiv, you certainly don't end up with massive asset price inflation with what you suggest...

Funny ares...

 

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#8) On July 29, 2008 at 3:45 AM, saunafool (98.41) wrote:

mgiv: Americans are the dumbest investors on the planet.

I don't know how much you've spoken to non-Americans about investing, but Americans are actually some of the better investors on the planet. Most educated Americans have a pretty good handle on basic financial concepts (even if they fail to put them into practice in their personal lives). In Europe, most people just go to the bank and put their money in government bonds because everything else is "too risky." In Asia, you see them lining up around the block to speculate whenever the market is going up. Then tearing out their hair when the market goes down. In Japan, they have stuffed their matresses with cash.

So, I think one of the overall themes of dwot's blog is that you just can't completely deregulate the financial sector. If you give people free money, they will take it, and eventually speculation takes hold of everything and leaves a cancer in the entire financial structure.

Where Americans seem to be foolish (small "f") compared to Europeans or Asians is that a lot of people are terrible with personal finances. Until recently, it was tough to find Americans adhering to the simple principle of "spend less than you earn." Our great healthy optimism (my favorite thing about America) combined with an unhealthy materialism (one of my least favorite things) makes a lot of people believe that they can buy whatever they want and "things will just work out."

So, I don't think Americans are bad investors, but that loose money policies created a subculture of speculation and gambling. It's unhealthy.

And I don't think the 30 year mortgage will ever go away in the U.S. Maybe it should, but it won't.

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#9) On July 29, 2008 at 8:44 AM, engstocker (< 20) wrote:

I have to disagree that 30yr mortgages are a bad thing, if you can get a low enough interest rate. I locked in a fixed 5.25% for 30 yrs on my home and I'm 27. Now if I can make an average of 8% investing my money, why would I want to give up the 8-5.25= 2.75% in interest I can earn on my money that I free up by not paying extra on my mortgage? Please feel free to comment if you think I'm wrong here. In my view paying your mortgage off early is just giving you a since of security because you actually own your home.

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#10) On July 29, 2008 at 12:02 PM, GS751 (28.07) wrote:

30 year mortgages are for suckers.  15 years with 20% down if you cant do that, rent....

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#11) On July 29, 2008 at 12:58 PM, dwot (99.56) wrote:

Well engstocker, you completely fail to understand how much more that costs you and the ways that it costs you more and you don't earn 8.5% risk-free.

Good life plan GS751.  Greenspan drastically changed the playing field and gave people a sense of locking in their costs by buying and the way he stepped the rates down over more than 20 years has certainly given people the wrong impression that homes always go up in value.  That trend has run out as the crippling effects now grossly out weigh the benefit that some got.

I think longer term we see homes come down to a much fairer value, one based on input costs and we also see the wages completely tank in the industry.  

This policy also allowed wages to get grossly out of line, with industries riding the interest rate declines having gained enormously relative to other industries.  

A reversal in home prices will drastically reverse that trend.

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#12) On July 29, 2008 at 12:59 PM, dwot (99.56) wrote:

Or at least that homes go up faster than other things...

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#13) On July 29, 2008 at 3:10 PM, engstocker (< 20) wrote:

DWOT - I completely agree it is not risk free. But I believe the statistic is something like the stock market has been delivery 8% or so average returns since the Great Depresion. But you cant make money without risk. So what I'm saying is the extra 2.75% I gain (8% - the 5.25%) is basically free money (not without risk though) as compared to putting that money toward paying off my home loan. In other words I'm borrowing money at 5.25% to make an average 8%.

I have enough money in the bank to pay my mortgage off today, but choose not to because I can make more with that free money by investing in real estate and the stock market and will probably not be able to borrow at 5.25% ever again because interest rates should rise.

Please tell me how your comment about me not understanding how it "costs me more and the ways it costs me more" instead of just making the statement. I'm just an engineer by trade not an economist so I would sincerly like to learn if I'm mistaken in my logic.

 

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#14) On July 30, 2008 at 8:32 AM, dwot (99.56) wrote:

I am going to assume you had awesome timing for getting into investments.  Certainly I think that if I'd gotten involved in them a few years earlier I'd be financially independent right now.

All that is not sustainable and if you look in depth at how it happened, well, it simply is going to take back from a lot of people.

You are right you probably won't be able to borrow at the rate you borrowed at ever again, but -8% returns are probably more likely on investments these days.

What part of the country do you live in? 

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#15) On July 30, 2008 at 9:02 AM, engstocker (< 20) wrote:

I live in Little Rock, AR. Real estate is almost non volatile here. You can almost count on 3-5% appreciation. We don't have rampant speculators or huge demand in housing like California or Florida or any number of places where home/land prices are artificially inflated. This makes me very comfortable investing in realestate when I see good deals. I make an average of 25% when I buy and sell realestate. But I couldn' buy it if I took my free cash and paid my mortgage off.....that's the point I guess I was trying to make. I could have a HELOC but that's another story. For the average person who knows no better your right. There better off paying the mortgage off on their house quicker rather than buying anohter six pack for the fridge or crap they don't need because their not disciplened enough to save it or smart enough to know what to do with it once they get it saved.

But for smart people, keeping as much cash free to buy investments when you see an incredible deal is by far the better option. Like the old saying goes, IT TAKES MONEY TO MAKE MONEY.

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